CEO's letter of confidence in merger was reckless

A drug company CEO's statements expressing confidence in a merger were made recklessly, a district court has found. The investors' fraud claim was allowed to proceed based on the only material misrepresentation or omission pleaded: statements in a letter by the CEO expressing confidence that the merger would go forward. The court found that the allegations suggested that the CEO knew that there were concerns that the merger would be called off but made statements supporting it to appease worried employees (Rubinstein v. Gonzalez, March 10, 2017, Dow, R.).

Biopharmaceutical company AbbVie Inc. announced in June 2014 a proposed $54 billion merger with Shire, a pharmaceutical company based in Dublin, Ireland. On October 14, however, AbbVie announced plans to back out of the merger and pay a $1.64 billion termination fee.

Tax inversions. The complaint hinges on several statements made by AbbVie and its CEO between June and October 2014. Foremost among those is a June 2014 press release listing several strategic rationales for the merger. According to the complaint, this press release failed to mention any tax benefits that AbbVie might enjoy by structuring the transaction as a corporation inversion, due to the stigma associated with inversions. In a tax inversion, a U.S. company in a merger with a foreign company allows the foreign company to become the parent so that the U.S. company avoids paying U.S. taxes. In subsequent statements, AbbVie downplayed the significance of the tax implications of the merger.

In September 2014, the U.S. Treasury Department issued a notice of its intent to crack down on the practice of tax inversions. This notice caused investors to doubt whether the merger would go forward, and Shire's share price dropped on the next day. Later that month, however, AbbVie's CEO issued a letter to Shire's employees (which was also filed with the SEC) in which he expressed confidence in the merger and noted that AbbVie was working on integration planning. On October 15, 2014, AbbVie issued a statement attributing its backing-out of the merger to the change in the tax rules regarding inversions.

Complaint. The complaint alleged that statements made by AbbVie and its CEO misleadingly downplayed the importance of the tax inversion to the proposed merger in violation of the antifraud provisions of the Exchange Act. In March 2016, the court dismissed the complaint, finding that the facts supported a reasonable belief that the CEO's letter was false or misleading at the time it was made. There was, however, no strong circumstantial evidence of conscious misbehavior or recklessness because the timing of the letter alone did not show that the CEO knew at the time that AbbVie was going to call off the deal.

Letter was reckless. The court denied AbbVie's motion to dismiss the amended complaint after finding that the letter recklessly led investors to believe that AbbVie still intended to go forward with the merger. While there were three statements at issue, the court only found (as it had in the earlier order) that the allegations regarding the letter were sufficient to support a reasonable belief that AbbVie’s omission of the fact that it was reconsidering the merger rendered misleading the letter's statement about continued planning for the transaction.

The court concluded that the CEO's letter was sent with a reckless disregard of the truth, but not with the intent to deceive. The court was persuaded by the allegations that the letter was at least severely reckless in making a public statement before AbbVie's board had considered the impact of the change in the tax laws. It was more than plausible, the court said, that AbbVie was undertaking a detailed analysis of the legal changes at the time the CEO issued the letter.

Further, an AbbVie director later suggested that the CEO's letter was sent to "calm Shire employee unrest." This, the court explained, suggested that the CEO knew at the time that there were public concerns that the merger would be called off and sought to appease worried employees.

Taken together, the court concluded that the facts were strong circumstantial evidence that the statements in the letter were made with a reckless disregard for the danger of misleading buyers into believing that AbbVie still fully intended to go forward with the merger when, in fact, it was deciding whether to walk away from the deal in light of the tax rule changes. The court accordingly denied the motion to dismiss to the extent it was based on statements made in the CEO's letter.